Debentures are financial instruments which are usually of long term.
They are issued by a company for a specified tenure with a specified rate of interest for the investor.
Thus it is a fixed income generating financial instrument.
Debentures are of two types namely convertible debentures and non-convertible debentures (NCDs).
A Non-convertible debentures (NCD) is that which cannot be converted into equity shares.
NCDs can be either secured or unsecured. A secured NCD offers greater protection to an investor
as the they are backed by the issuer company's assets to fulfill the debt obligation unlike unsecured NCDs.
NCDs offer diversification to an investors portfolio. It can act as a good fixed income product
offering better than bank FD returns. NCDs are either tax free or taxable and
listed NCDs do not attract TDS (tax deducted at source) on interest earned by investors.
Most of the NCDs are not available to NRI investors for investment.
Listed NCDs provide liquidity to an investor to exit his investment before the maturity date.
An investor can also get capital gains if interest rates go down and
he is holding a high interest rate NCD than he can sell the listed NCD in the exchange and earn capital gains.
Call Option - If interest rates go down and company is able to raise money at lower interest rates
than it can use the Call option to ask the investor to surrender the NCD before the maturity date
in exchange for the principal investment made by the investor.
Put Option - If interest rates go up and investor is able to deploy money at higher interest rates
than he can use the Put option to ask the company to refund his principal investment before the maturity date.
NCDs are rated by rating agencies like CRISIL, CARE, ICRA and others. Higher the ratings stronger
the financial position of the company issuing the NCD.
Sovereign Gold Bonds (SGB)
SGBs are securities denominated in grams of gold and issued by the government.
RBI issues the bond on behalf of the government of India. The government launched these bonds
so that investors wanting to invest in gold can buy these bonds instead of investing in physical gold.
Investment and maturity both are in Rupees.
For investors SGB offers an easy way to invest in Gold as the risks and costs of storage are eliminated.
SGB is free from issues like making charges and purity of gold in the case of jewellery form.
Investors are assured of the market value of gold at the time of maturity.
Biggest benefit is the Bonds bear interest at the rate of 2.50% (fixed rate) per annum
on the amount of initial investment. Interest is credited semi-annually to the bank account of the investor and
the last interest will be payable on maturity along with the principal.
The tenure of the bond is 8 years but early encashment/redemption of the bond is allowed after
fifth year from the date of issue on coupon payment dates. The bond is also tradable on Exchanges,
if held in demat form. It can be transferred to any other eligible investor.
Interest on the Bonds don't attract any TDS but is taxable as per the provisions of the Income-tax Act,
1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted.
Indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.
SGBs are eligible to be used as collateral for loans from banks, financial Institutions and
Non-Banking Financial Companies (NBFC). The Loan to Value ratio will be the same as applicable
to ordinary gold loan prescribed by RBI from time to time.
The Bonds are issued in denominations of one gram of gold and in multiples thereof.
Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals,
4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified
by the government from time to time per fiscal year (April - March).
RBI Floating Rate Savings Bond (FRSB)
From July 2020 The government has announced the launch of Floating Rate Savings Bonds,
2020 (Taxable) with an interest rate of 7.15%. The interest rate on these bonds will be reset every six months,
the first reset will be on January 01, 2021. Interest will be payable every six months.
The bonds have a maturity of seven years from the date of issue.
Premature redemption is allowed for specified categories of senior citizens.
The facility of premature encashment of bonds is available to the eligible investors
after Lock in period of 4, 5, and 6 years in the age bracket of 80 years and above,
between 70 to 80 years and 60 to 70 years respectively.
An eligible investor can surrender the bonds at any time after the 8th, 10th and 12th half year corresponding
to the respective lock in period but redemption payment shall be made on the following interest payment due date.
Thus, the effective date for making the payment will be 1st January and 1st July every year.
50% of interest due and payable for the last six months period of the holding period
shall be recovered as penalty from the investor for premature encashment.
Interest received from these bonds is taxed as per the income tax slab of the applicant.
TDS is also applicable on the interest income. The bonds are not tradeable in the secondary market and
cannot be used as collateral for loans from banks, financial institutions, NBFCs etc.
The minimum investment allowed in these bonds is Rs. 1,000.
The interest payable on January 1 and July 1 will be linked to the then prevailing rate of interest
on National Saving Certificate (NSC). RBI Floating Rate Bonds will pay 35 basis points more than the rate offered on NSC.
These bonds are popular with investors because of its implicit sovereign guarantee and excess returns offered over NSC.
